Is Early Retirement Achievable With Proper Financial Management?

It is possible to retire early with proper and detailed financial management. With retirement a new phase of life begins. Many people worry whether their income will be enough to finance their standard of living.

Smart retirement savers make comprehensive retirement plans in their early 50s. This shows you what your income and expenses will be in retirement and how much assets you need to close your pension gap. 

The generations of people over 70 today did not have to worry much about how much money they would have available in retirement. When they reached their standard retirement age  or wanted to stop working a little earlier, they lived on their pensions. It’s no longer that easy today, as pensions are falling and costs are exploding. 

Pensions have long been inadequate to ensure an adequate standard of living. Many people are aware that additional private pension provision is essential. But that’s not all: if you want to ensure early on that you have enough money in retirement, you need to start planning for your retirement in your early 50s at the latest.

Retirement planning is the financial roadmap for your retirement. It includes aspects of retirement planning , income planning, asset management and estate planning. The heart of retirement planning is the budget, i.e. the comparison of your expected income and expenses in retirement.

How Can Effective Financial Management Accelerate Early Retirement?

The rule of thumb is: you should start planning your retirement at least 10 to 15 years before you plan to retire. Normally this is between 50 and 55. But if you plan to retire early, it’s better to start thinking about the topic a few years before your 50th birthday.

Why so early? Only if you realize early on that you need to close a larger pension gap from your assets – and the existing assets are not sufficient for this – will you have enough time to save the capital you need. The longer the savings phase, the stronger the compound interest effect is and the higher your equity share can be.

What Are The Key Principles Of Early Retirement Planning And Saving?

At the beginning of every retirement planning is the budget. To do this, compare your expected expenses with your expected income in retirement. Start with your spending. Very few people know exactly how much they spend on what each month.

For the budget, you should document your expenses over a certain period of time. Since some large items such as insurance arise annually, it makes sense to keep a monthly and an annual budget book in parallel.

Private pensions and capital life insurance policies have become due. Disability insurance is no longer necessary. Only health insurance becomes more expensive as you get older.

Taxes remain a significant expense even in retirement. The tax burden usually decreases, but often much less than expected. Housing costs can decrease in retirement if homeowners move to age-appropriate housing that better meets their changing needs and is more affordable.

Leisure expenses, on the other hand, often increase because there is more time in retirement – including for spending money. Now you can realize plans that you may have dreamed of your whole life.

Expenses for vacations, hobbies and leisure activities often increase significantly, especially in the first few years after retirement. Health care costs can also increase or vary greatly. Investors receive interest and dividends. Capital gains are paid out once or several times a year. Therefore, you should collect all income per month and for a whole year. 

Are There Retirement Investment Strategies Tailored For Early Retirees?

I can announce some popular retirement investment strategies tailored for early retirees. 

Invest like a pension fund: This strategy works like a pension insurance policy: you define the scope for fluctuations in value and derive your risk capacity and investment strategy from this. Income is ensured from interest income, dividends and, if necessary, material consumption.

Income from rental and leasing: With the farmer strategy, rental income provides the necessary income. The real estate investment form offers security and potential for appreciation.

However, the capital investment is high, the return is low and flexibility is limited because a large part of the capital is tied up. There are also risks of loss of rent and damage. In addition, it is advisable to keep a larger amount of liquidity in reserve for investments or renovations. 

Life annuity from an insurance company:  For those who are security conscious, the mom-and-pop strategy is an option. With this strategy, enough capital is invested in an annuity  to ensure income needs.

The remaining capital is invested at low risk, primarily in bonds. Life annuities offer security and the income from an insurance annuity is guaranteed for life. However, the paid-in capital or the property cannot be inherited. This strategy is therefore particularly suitable for people without heirs.

Real estate annuitization:  If you live in a home that you have paid off, you can turn the capital tied up in the house back into cash when you retire: with a real estate annuity. The house is sold and you receive sole right of use for life as well as a monthly annuity.

Please note that taxes and, if applicable, health insurance contributions will be deducted from the amounts you are entitled to.

What Are The Risks And Considerations Of Early Retirement Decisions?

If you don’t want to limit yourself financially, you have to save more capital in a shorter period of time – namely before you retire earlier. Because when you retire early,  you have to close two income gaps: the lost salaries and the lifelong reduction in pensions.

The earned income for the years in which you no longer work is missing. For every year that you want to quit, you will miss one year’s salary, adjusted for lower income taxes and pension insurance contributions. In addition, you will not collect any earnings points in the years you no longer work, and your pension will be lower. 

And if you receive your pension before your standard retirement age, you will have to accept deductions because your pension will be reduced by 0.3 percent for each month you withdraw. 

How Do Lifestyle Choices Impact The Feasibility Of Early Retirement?

Lifestyle choices dramatically impact the feasibility of early retirement. Since you should consider many factors. You should determine what entitlements you have from pension and life insurance policies as well as company pensions and consider now whether you would like to receive these as a one-off payment or as a lifelong pension. 

• Decide how you would like to invest the free capital that is available to you in retirement.
• Get a detailed overview of your debts, when they are due, and determine whether and under what conditions early repayment would be possible. Then consider whether it makes sense to repay the loans. Many people want to be debt-free when they retire.
• Decide when you will retire.
• Think about your living situation: Do you want to keep your house or would you like to move into a condominium when you retire? If you want to exchange the house for an apartment, you should take care of financing early on.
• Decide when you want to withdraw your pension savings.
• Redefine the goals for your wealth: Do you have to consume it in a controlled manner to secure your income, or can you afford to preserve the substance for your heirs?

See you in the next post,

Anil UZUN